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This paper was written while Stephen Golub was a visiting scholar in the Research Department. We thank Dominique Desruelle, Graham Hacche, and Flemming Larsen of the IMF, and Patricia Capdevielle and Christopher Kask of the U.S. Bureau of Labor Statistics for helpful discussions and comments, and Teng-Siew Boxall for providing the trade weights in our effective exchange rates.
This narrow definition of price or cost competitiveness should not be confused with the popular usage of the term competitiveness, which refers to a broad assessment of economic performance.
Real exchange rates often refer to the relative price of tradable and non-tradable goods within a country, rather than on the relative price of domestic to foreign goods. The focus here, however, is on international competitiveness across countries, so the traded/non-traded goods measures of real exchange rates are not discussed further in this paper. For further discussion of this issue see Turner and Van’t dack (1993, section V.) and Wickham (1993).
Even if the law of one price holds for all goods separately, aggregate price indexes could still diverge due to differences in weights across countries. But such changes would not reflect movements in competitiveness.
Isard (1976) for example showed sustained departures from the law of one price across countries even for very similar manufactured products.
See Artus and Knight (1984) for a discussion of the role of competitiveness indicators in assessing the appropriate level of exchange rates.
For a review of the issues raised by international differences in wages and labor standards, see Golub (1997).
Italy and Sweden are obtained from national sources.
In some cases manufacturing value added deflators were not available. If so, industry value added deflators, producer price indexes or GDP deflators were used. See Appendix 1 for details.
BLS data for production workers in manufacturing shows that the share of employer contributions averages about 20 percent of labor costs for industrial countries and 10 percent for developing countries in the 1990s, but there is substantial variation within each group of countries. Source: BLS International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, Supplementary Tables, Table 13. The BLS data on labor compensation of production workers in developing countries is limited to a half dozen countries, however.
Elsewhere, Golub (1995) obtains international comparisons of levels of productivity and labor costs using the UNIDO data base. To do this, estimates of purchasing-power parity exchange rates are also needed. Hooper and Larin (1989) and Hooper and Vrankovich (1995) compute unit labor cost levels for industrial countries.
For a few industrial countries, CPIs were also used to backdate unit labor costs (Australia 1975-1977, Greece 1975-1979 and New Zealand 1975-1977).